News and Market Analysis

Key Drivers for the Week of Nov 23 – Nov 27
COVID Vaccine

-Record infections, renewed restrictions dim recovery outlooks as we wait for vaccines

-U.S. markets closed Thursday Thanksgiving; Japan closed Monday

-Attention on U.S. confidence, income, consumption, durables, knew home sales data

-Treasury auctions record $169 bln in 2-, 5-, 7-year notes Monday, Tuesday

-BoK expected on hold at 0.50%; Japan services PPI, Tokyo CPI expected in deflation

-Brexit progress remains slow, talks may be extended to early December

-Europe Markit manufacturing, services, composite PMIs; ESI economic confidence

-German Ifo Business Climate, GfK consumer confidence, GDP, trade prices

-ECB: Lagarde, Schnabel, Lane; Financial Stability Review; October policy account

-UK data on PMIs, CBI Distributive Trades Survey, Nationwide house prices

Week Ahead: Virus Versus Vaccine and the V-Recovery

On November 23, 2020

The second wave of Covid infections globally and increasingly stringent lockdowns which in turn have led to a resurgence of uncertainties over the near term growth outlook. And they are overshadowing the positive vaccine developments that offer a more optimistic view for the medium term. Granted, moderation in activity was widely expected after the Q3 surge as economies reopened following the pandemic shut-downs. But while the new restrictions are less onerous, winter conditions will exacerbate the negative effects and will add to worries over a dreaded double dip recession. Concurrently, U.S. growth is seen at risk given the lack of additional fiscal stimulus with many of the relief measures expiring at the end of the year. Hence, attention will be split between the virus and the lockdowns, and the cornucopia of data that will reflect more of the Q4 economy. In Europe, November confidence numbers will be in focus, as well as ongoing Brexit talks. Asia’s calendar is thin, likely to keep the focus on virus developments globally.


In the U.S., Wall Street and Treasuries saw rangebound, cautious trading last week as many crosscurrents buffeted the markets — rising virus case counts, renewed restrictions, vaccine developments, stimulus uncertainties and increasingly dismal growth outlooks — were all in play. We suspect that this week will feature more of the same in terms of market action, with the focus on the re-ignition of the pandemic and the negative implications for growth. There have been some whispers of dreaded double dip recessions for the U.S. and Europe, although that is not our base case scenario.

The calendar will be busy in this holiday shorted week, with numbers condensed into the first three days. November data is at something of premium as it captures the pick-up in virus cases and ratcheting up of restrictions since October. Consumer confidence (Tuesday) is expected to rise to 104.0 from 100.9 in October. The index has improved from a 6-year low of 85.7 in April. The revised November Michigan sentiment report (Wednesday) is expected to show a boost to 79.0 from the lean 77.0 preliminary reading, versus a 7-month high of 81.8 in October. Confidence measures were oscillating near historic highs before being crushed by COVID-19, only to bounce higher after the plunge in Q2. Notably, it is remarkable how firm the consumer measures have stayed relative to prior recessions, suggesting unexpected resilience on the part of households.

The housing market remains of considerable interest as it’s one of the leaders of the pandemic recovery. The surge in demand following the reopening of the economy amid the shift in consumer preferences toward more spacious, single family homes in suburbia given remote learning and extended work-from-home arrangements, continue to underpin, along with deteriorating conditions in urban areas and record low mortgage rates. These factors are also causing a de-linking of the housing cycle from the typical school year trends. We expect a 0.6% October increase for new home sales (Wednesday) to a 965k pace from 959k in September, leaving sales just under a 14-year high of 994k in August. Durable goods orders (Wednesday) are seen rising 1.0% in October with a 2.0% climb in transportation orders. A 0.1% gain in personal income (Wednesday) during October is projected after the 0.9% increase in September. Consumption should rise 0.6% after the 1.5% bounce in September. Recall that April income received a sizable boost from the CARES Act, but that has been partly unwound in each month since. Declining jobless benefits have also been a factor undermining income. Speaking of which, initial jobless claims (Wednesday) for the week of November 21 should decline -22k to 720k, after a 31k bounce to 742k from 711k. The second look at Q3 GDP (Wednesday) will be of some interest, even though Q3 is well in the rear-view mirror.

The earnings calendar continues to tapper off, with a spare slate due this week. Monday has BHP, Agilent, and Warner Music. Tuesday brings Medtronic, Vmware, Autodesk, Dell, Analog Devices, Best Buy, HP, Hormel Foods, Dollar Tree, Burlington Stores, J.M. Smucker, and Autohome. Wednesday reveales Deere & Co. and No releases are due Thursday and Friday.

Heavy Treasury supply hits and like the data, will be condensed into the first part of the holiday abbreviated week. The market will have to absorb a record $169 bln in 2-, 5-, and 7-year notes. The total package was boosted by $7 bln with the volume of each issue increased to new all-time highs. Treasury is selling $56 bln in 2-year notes (Monday), $57 bln in 5-year notes (Monday), and $56 bln in 7-year notes (Tuesday). The shorter notes were bumped up by $2 bln each, and the 7-year was boosted by $3 bln. The debt managers also outlined a $24 bln reopened 2-year FRN (Tuesday), and $105 bln in 3- and 6-month bills (Monday). The doubling up of coupon auctions, as will be the case Monday, typically does neither issue any good. Treasuries richened on Friday. with the wi yields dipping slightly, leaving the 2-year at 0.165%, the 5-year at 0.385%, and the 7-year at 0.620%.


In Canada, the calendar has a drought of data following the deluge last week. Average weekly earnings for September are due Thursday, but the report is always overlooked. The CFIB’s Business Barometer for November may be of some interest, but again it is not a market mover. BoC Deputy Governor Gravelle speaks on (Monday), providing “Assessment of risks to the stability of the Canadian financial system, including risks stemming from the COVID-19 pandemic.” Senior Deputy Governor Wilkins participates in a panel (Tuesday) on “New Policy Frameworks for a Lower-for-Long World.”


Focus will remain on Covid developments as markets continue to walk the tightrope between rising infection, hospitalizations, and deaths, and hopes for a sooner rather than later rescue from vaccines. The economic outlook remains cloudy, though hopes are that the globe will begin to turn the corner at the start of the New Year. This week’s regional calendar is quite light, with no data due from China. Japan will be on holiday Monday for Labor Thanksgiving Day, and later in the week will release November Tokyo CPI. Price, employment, and production data dot the calendars elsewhere. The only central bank meeting will be South Korea’s BoK, where no change to its 0.50% repo rate is expected.

Japan will be closed (Monday) for Labor Thanksgiving Day. October services PPI (Wednesday) is expected to have fallen to a -0.5% y/y rate of contraction after accelerating to a 1.3% clip previously, which was the fastest since March. Prices were hit by the pandemic shutdowns during the spring. Tokyo November CPI (Friday) is penciled in falling to a -0.5% y/y rate from -0.3% overall. The October rate was the first negative print since October 2017 and was the fastest rate of decline since March 2017. The core rate is seen sliding to -0.7% y/y from -0.5%. The October drop was the largest since December 2016, and a figure in line with our projection would be the fastest rate of contraction since March 2011. South Korea’s BoK meets (Thursday) and is expected to leave its repo rate unchanged at 0.50%. It’s been on hold since the quarter point cut in May from 0.75%. Policy was eased by 50 bps on March 16. The year began with the rate at 1.25%. November consumer sentiment is due Tuesday. Taiwan October industrial production (Monday) should slow to a 6.0% y/y rate of expansion from 10.7%, while October unemployment (Monday) is seen steady at 3.8%. October leading indicators and GDP are due Friday.

Singapore October CPI (Monday) is seen unchanged, as it was in September. Q3 GDP (Monday) will likely be revised up to -6.0% y/y from -7.0%. October manufacturing production (Thursday) is forecast at 12.0% y/y from 24.2% previously. In Thailand, October exports (Monday) likely fell at an -8.0% y/y pace from -3.9% in September. October manufacturing production (Wednesday) is anticipated at -2.0% y/y from -2.8%. Hong Kong October trade (Tuesday) should see the deficit narrow slightly to HKD 12.2 bln from 12.7 bln. Malaysia October CPI (Wednesday) is estimated at -1.4% y/y, identical to September.

Australia’s calendar has a speech by Deputy Governor Debelle (Tuesday) at the Australian Business Economists webinar. At the meeting this month, the RBA increased stimulus to ensure recovery. As expected, the bank announced a package of measures designed to secure a rapid recovery from the crisis now that lockdowns have lifted. The RBA cut its key interest rate to 0.1% from 0.25%, as was widely anticipated. It also announced that it will buy AUD 100 bln of government bonds with maturities

of around 5-10 years over the next six month. Furthermore, the bank announced that the rate paid to commercial banks for their deposits at the central bank will be cut to zero. The focus is on lowering refinancing costs. On negative rates, the Governor said he sees no appetite to go there. Economic data is sparse this week, but does have private capital expenditures (Thursday), expected to decline -3.0% in Q3 (q/q, sa) after the -5.9% drop in Q2.

New Zealand’s docket has Q3 retail sales (Monday), expected to rebound 16.0% after the 14.6% plunge in Q2 (q/q, sa). The trade report (Thursday) is projected to show a NZD -1.2 bln deficit in October following the -1.0 bln shortfall in September. The RBNZ publishes the Financial Stability Report (Wednesday). The next policy meeting is February 24 of next year. Earlier this month, the RBNZ topped up stimulus with a new Funding for Lending Program to start in December, aimed at reducing banks’ funding costs and lowering interest rates. The bank’s economic projections were less pessimistic on growth and inflation and cut back the projections for peak unemployment. The cash rate was left unchanged at a record low 0.25% and the Large Scale Asset Purchase program remained at NZD 100 bln. The statement reiterated the commitment to use additional tools if necessary, but markets have started to price out expectations that the bank will move towards a negative rate regime next year, on the back of the less pessimistic outlook. The balance of risks remains tilted to the downside, but it seems that in the central scenario further rate action won’t materialize.


Eurozone: vaccine news continue to look promising but progress on Brexit remains slow and the European Commission reportedly briefed envoys from the EU’s 27 member states that talks may have to be extend through to early December. Meanwhile there were reports that some EU leaders want to clarify to chief negotiator Barnier that no deal is better than one that would potentially damage the single market. According to Bloomberg, some members of the bloc have called for contingency plans to be stepped up. The most likely outcome remains a limited and narrow deal that will likely leave both sides on course for prolonged trade squabbles in the future if and when the U.K. diverges from EU standards and the EU retaliates. No wonder then that firm and enforceable rules on the governance of an agreement is one of the key points for the EU in any deal and reportedly one of the sticking points at the moment.

The data calendar is very busy this week, with the remaining confidence numbers for November unlikely to make pretty reading. Markit PMIs kick off the data round on Monday and we are looking for a further decline in manufacturing confidence to 52.0 (median 53.2) from 54.8. Services will be hit even harder by lockdowns — the respective PMI is likely to fall back to 41.9 (median 42.0) from 46.9, which should leave the composite at 47.0 (median 45.6) from 50.0. That would signal a fall back into contraction territory, and will likely be mirrored by a weak ESI Economic Confidence number (Friday), which we expect to show a drop to 86.0 (86.5) from 90.9.

In Germany, where lockdowns have been less strict than elsewhere and where the manufacturing sector continues to benefit from the ongoing recovery in major export markets such as China, the situation is

not quite as bleak as in countries like Italy or Spain. Still, the key Ifo Business Climate index (Tuesday) is nevertheless expected to drop back markedly to 90.3 (median same) from 92.7.

Eurozone M3 money supply growth (Thursday) should continue to show a huge amount of money creation thanks to the ECB’s generous liquidity provision. Preliminary French HICP numbers (Friday) are unlikely to indicate a turnaround on the inflation front and German Q3 GDP is too backward looking to have much of an impact, although the breakdown, which will be released for the first time, may attract some interest.

There are once again plenty of ECB speakers, which are likely to collective stress that even with vaccines underway, economies will still need substantial monetary and fiscal support and that the ECB is readying a package of measures for the December meeting. A strengthening of PEPP and TLTRO programs remains the most likely scenario for the next meeting.

U.K.: trade talks between the EU and UK are commencing via video conference after one of the EU’s team tested positive for Covid. The latest in a series of deadlines that have so far come and gone, now appears to be mid next week. An EU source cited by the UK’s Sun tabloid said that talks can only continue to mid next week before “time will get the better of us.” Time really is running out now given the time needed for the ratification process before the UK’s exit from the common market and customs union on January 1. Fishing rights and level playing field rules remain the stumbling blocks between the EU and UK, and neither side is showing any sign of wanting to make the first move in the concessions game. It would be imprudent to rule out the risk of a no deal, but we still expect win-win will prevail rather than lose-lose, and that an accord will be reached. We expect the pound to rally on any concrete news that a deal has been reached. Canada, meanwhile, looks set to be the latest to sign a continuity agreement with the UK, which would maintain trading on the largely the same terms as under the prevailing agreement with the EU.

The UK data calendar this week features the preliminary UK PMI reports for November (Monday). Given the Covid-related lockdown restrictions that have been heavily focused on the hospitality and retail sectors, the consensus expectation is for a sharp fall in the dominant services PMI reading to 42.5 from 51.4 in October. The preliminary manufacturing PMI headline is expected to fare better in declining more moderately to 50.5 from 53.7. The composite PMI reading is seen dropping to 42.5 from 52.1, which would signal that the private sector is once again back in contraction, which is looking like the second dip of a double dip recession. Other data out of the UK will be second tier.

Switzerland: The Swiss data calendar is quiet.